Pounding Britain

I've seen a lot of random stuff posted about the situation with the £. It is actually not that complicated so I thought I would try and simplify...

Why is the pound less valuable

The pound is weak because the rest of the world are speculating that our economy is doomed because of Brexit. Simply put- people with money convert their £ reserves into other currencies. With fewer people wanting to buy £'s, they become less valuable. This is a big reason for inflation (the price of stuff going up) but not the only one. 

Currency devaluations do not always mean inflation, but it does for Britain. 

The main reason for the price of the stuff going up is because Britain is a tiny island with very few natural resources and a relatively small manufacturing base (which is also largely under foreign ownership). This means Britain has little choice but to buy stuff from other countries (trade) with a weaker £.  

Britain doesn't have an abundance of natural resources

Yes, in the "good old days" Britain had an Empire from which she took natural resources to fuel her significant and world leading manufacturing sector. Britain doesn't and couldn't do this today because humans have evolved sufficiently to understand that this behaviour is essentially tantamount to stealing and largely frowned upon. The Americans and Russians still do this sort of stuff today but very rarely and they usually cite 'National Security' as a reason. This is also mostly frowned upon and only possible because of the enormous investment those nations put into their projected military force. 

As a result of Britain's modern geographic insignificance and diminished military, most of the things British people and businesses buy now come from abroad -probably the same places they always did but now Britain actually has to pay for them - with a weakened £. 

This increases the cost of production which the consumer (you) has to absorb.





Britain's manufacturing base is not competitive and largely owned by foreign investors

Even when companies manufacture from materials resourced within Britain (this is rare) there is still a chance that these companies are under foreign ownership. If this is the case, the owners usually convert their profits to their native currency or in the case of a public company, they role up profits into the currency of the International HQ (it's a bit more complicated than this with hedging and stuff but this is largely the case). 

In both scenarios described above, foreign owners will be making less profit so they will respond by increasing prices to compensate.

Simple Right? So, in summary...

• Is the £ weaker - yes. 
• Has Britain's manufacturing sector been able to compensate and keep the price of stuff the same? - no.
• Have wages been rising to compensate for rising prices - no.
• Is this a problem? - yes.

What can the British Government do about it?
The government has two options really. 

Option 1: Embrace the devaluation of the pound

This would see the government encourage (usually by investment) the intense mining of natural resources within its geographic boundaries so that the British economy is less dependent on trading with other nations for raw materials. Now might be a good time to crack open whatever successive British governments believe to be lurking in and around the Falkland Islands.... reopen the mines and start chopping down trees! 

It would also require a huge investment in the manufacturing sector to get British production levels up and prices down - both domestically and for export competitiveness. To compete with China, Turkey and India in the export market Britain would need to make either a huge investment in technology or restructure her workforce and their pay. It's more likely to be a technology investment because Britain doesn't have masses of cheap labour at its disposal like her competitor's do. 

Option 2: Fight the devaluation with interest rates and confidence boosting investments

This would require the British Government to provide incentives for investors to put their money back into the £. This is usually done with hiking interest rates (so investors get a better return) but also by announcing large scale investment plans that will likely boost the British economy and therefore investor confidence. 

This option wouldn't require Britain to magic natural resources or a manufacturing sector out of thin air and it would allow British companies to go back to creating the majority of their value from invisible goods like intellectual property and brokerage (finance, engineering design, architecture, research, etc). It would also see a boost (from inward investment) to infrastructure projects, thus benefiting the construction sector. 

What do I think the British Government will do? 

Britain has a Tory government. A very Tory government. So Tory, it makes Maggie Thatcher look meek. They have augmented Brexit and as a result increased the significance of their office (as Brexiteers would put it, taken the power back). 

My guess is that they will try to continue that projection of power grabbing and look to get the Bank of England back under their control again. Tories have a long and loving history with the Bank of England and moreover - the interest rate! 

The current pain caused by a weak £ is a perfect scenario for a Tory government. They can let the public feel the pain of their decision to Brexit as the cost of their food, clothes, and gadgets go up. Then, when sufficient public discontent exists, it will provide Theresa May with a very strong mandate to pressure the Bank of England into increasing the interest rate (don't be surprised if her party also creates a scenario whereby the Bank of England gets reabsorbed into the political landscape). 


A higher interest rate would strengthen the £. However, it would also increase the cost of mortgages and loans. This won't bother a Tory government though (OR proper Tory voters) because they don't have mortgages, they only have savings... higher interests rates benefit them. This is 'conservatism' in it's purest form -keeping the distribution of wealth and social mobility as static as possible. 

It is the humble assessment of this blogger that this British government won't have the substance to attempt a restructuring of the economy to suit a weaker pound. It is far more likely that May's government will pursue a short term lever pulling strategy and along the way try to absorb as much power as they possibly can (Bank of England being the prime target). 

With no real opposition in place (Labour and Liberal Democrat parties destroyed) and the poorer people focused on immigration -there is really no one to challenge May and her merry band of right-wingers.

My cheery forecast: If you have any debt, life is about to get a whole lot more expensive. If you have a ton of savings and don't rely on economic growth for your income -make hay with May!

If all that was a bit too depressing or boring - here is a rendition of the national anthem on the backdrop of the union flag (I wonder how long Scotland's colours will remain in there...)

Thanks for Reading,

Chancey